Can a denomination or its fiscal agency be held liable for damages and debts sustained by, say, a local church or a college related to the denomination but not controlled by it?

The answer to that question may emerge from a monumental legal struggle in California that involves the United Methodist Church (UMC). And a preliminary sounding of the U.S. Supreme Court has worried leaders of many denominations.

Problems for the UMC began last year with the bankruptcy of Pacific Homes—a network of fourteen retirement and health care facilities in California, Arizona, and Hawaii, headquartered in California. Before a court-appointed trustee took over management in November, 1977, Pacific Homes was related to the UMC’s Pacific and Southwest Conference, a link that had existed for sixty-five years.

Several lawsuits totaling more than $400 million were filed by the trustee and by residents and bondholders of Pacific Homes. The suits named the regional conference, the UMC itself, and the UMC’s central funding agency—the General Council on Finance and Administration (GCFA), based in Evanston, Illinois—and alleged a breach of contract, fraud, negligence, mismanagement, and the like.

Judge Ross G. Tharp of San Diego Superior Court handed down a ruling last March that exempted the UMC from a $266 million class action lawsuit filed by about 160 of the 1,800 residents of Pacific Homes. Curiously, though, he ruled that the GCFA should stand trial. If the UMC could be sued in the case, said Tharp, the action could “effectively destroy Methodism in this country.”

The reason? Judge Tharp apparently foresaw the possibility of individual church members being held liable for any judgment against the denomination. ...

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